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China and the Debt-Refinancing Game in 2017

Higher borrowing costs and weaker profits could be a combustible mix

By

Nathaniel Taplin

Updated Jan. 3, 2017 4:18 a.m. ET

In 2016, China proved again how difficult it is to bet against the nation’s formidable credit-driven economy. The nation entered the Year of the Monkey with industry deep in deflation and firms rapidly shedding workers. A $3 trillion credit jolt later, prices have rebounded, corporate profits are rising, and bond defaults have slowed sharply.

The results might seem impressive. But the cost has been substantial: even higher debt levels for state-owned firms and a dangerous rise in short-term borrowing just as the Federal Reserve...